Ethereum's builder-proposer split: a key to modular decentralization

After the Merge, Ethereum will trigger a shift in paradigm that is much more far-reaching than a mere switch from proof-of-work to proof-of-stake. Modularizing at the infrastructure level may bring in a new type of stakeholder: the block builder.

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Ethereum is a platform that supports smart contracts and ERC-20 tokens.

Ethereum has two major stakeholders on the transaction side: users and miners. Core developers, exchanges, and wallets are also key groups, but without users and miners, there would be no network.

When a user wants to make a transaction, they have to pay a gas fee so that miners can process the transaction and place it into blocks. Miners typically work in groups called mining pools. The purpose is for miners to share resources and generate the same level of revenue for each miner, as well as benefit from the mining pool operator's experience, expertise, and software infrastructure.

Mining pool operators have a lot of influence over the Ethereum network, since their ability to determine transaction order allows them to extract MEV from all blocks that they process.

MEV optimizes the mining process to maximize revenue, which is done by determining which transactions to include and in what order. The most profitable configuration of transactions with the highest level of fees is typically selected.

According to CryptoCompare, five mining pools controlled 65.4% of Ethereum's hashrate in November 2018. That is a sign of serious centralization deep in the Ethereum infrastructure. For example, Ethermine alone had 25% of all mining during that time period

The transition of leadership that occurred following the merger

When Ethereum switches from proof-of-work to proof-of-stake, miners will disappear and validators will replace them. In the post-Merge proof-of-stake system, Ethereum will adopt a modular approach for creating and validating blocks.

The ability of individual components in a system to perform specific tasks independently is known as modularity. The concept has been around in computer science since the 1960s. When Eth1 and Eth2 were renamed, we saw an emphasis on modularity. Ethereum's original proof-of-work chain became Eth1, the "execution layer" where Ethereum's applications reside, while the Beacon Chain became Eth2, the "consensus layer" where nodes will agree on the state of the network.

In the future, the modular approach will be applied to the processing of transactions in transaction-builder separation (TBS) form. TBS is simply a separation of block building and block validation into two distinct activities. A new stakeholder group called the block builder is created as a result.

In a recent episode of the "Bankless" podcast, Matt Cutler, co-founder and CEO of Blocknative, provided an overview of block builders and how he sees them cooperating with other key stakeholders in the Ethereum ecosystem.

Cutler explains how searchers and miners interact with the MEV blockchain. Searchers often use bots that seek to maximize MEV in a variety of ways, some of which are benign while others are considered malicious. In any case, the searcher sequences transactions, produces a profit-maximizing transaction bundle and then offers it to a miner or validator for inclusion in a block in exchange for their share of the profits.

After the Merge, block builders will take over. Instead of searchers offering transactions directly to validators (also known as proposers), they will send optimized transaction bundles to block builders. A third-party system called mev-boost will then aggregate optimized blocks from a variety of builders and offer them to validators. Finally, validators will select and propose the most profitable blocks to the Ethereum network.

Block makers are on their way

Flashbots, the developers of mev-boost, say that MEV centralization occurs when mining and staking pools vertically integrate with trading firms to increase MEV profit. The

According to Cutler, the Ethereum community is so optimistic about mev-boost that developers plan to add PBS into Ethereum's protocol within a year or two after the proof-of-stake transition. In the meantime, if everything goes as planned, mev-boost will be accessible immediately after the Merge.

A pulse is a way to check the heart rate.

The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

Validated methods are used in

The U.K. government is seeking public input on its plans to tax decentralized finance (DeFi).

• The government is seeking comments on taxing crypto-asset loans and staking from investors, professionals, and firms engaged in DeFi activities. It said that it “is interested in ascertaining whether administrative burdens and costs could be reduced for taxpayers engaging in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.” The public comment period starts July 5th and ends August 31st.

Nansen’s Solana integration is up and running.

• The on-chain analytics platform has added Solana NFTs (non-fungible tokens) to its data toolkit. The data, which includes trade volumes, wallet analysis and minting dashboards, is sourced from Magic Eden and OpenSea, the network's most popular marketplaces that host more than 95% of all Solana NFT transactions.

Following the resignation of Argentina's economy minister, Martin Guzmán, Argentines sought shelter in stablecoins.

• Last weekend, Argentines purchased between two and three times as many stablecoins as they typically do on a weekend. Major crypto exchanges said that customers in Argentina are looking to hedge against a potential devaluation of the Argentine peso, whose buying power has dropped considerably over the past year due to soaring inflation.

European Parliament members claim that NFT platforms should be subject to anti-money laundering regulation.

• On June 30, The European Commission agreed on new laws known as the Markets in Crypto Assets (MiCA) regulations that would license crypto companies and impose identity checks on transactions. An amendment to those anti-money-laundering laws was proposed that seeks to make NFT platforms "obliged entities" under the European Union's law. That would mean that NFT marketplaces like OpenSea might have to assess the risk of illicit finance flowing through their systems.

Voyager Digital suspended all trading, deposits, withdrawals and loyalty rewards.

• "This was a tremendously difficult decision, but we believe it is the right one given current market conditions," said Stephen Ehrlich, CEO of crypto broker Voyager Digital, on July 1. "The decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together." The announcement follows Voyager's disclosure that it had significant exposure to Three Arrows Capital, a crypto hedge fund that is now liquidating. Read more here.

This week's interesting fact

CoinDesk's Ethereum validator is discussed in the weekly analysis by Valid Points. All profits made by staking will be donated to a charity of our choice once transfers are enabled on the network. To learn more, read our announcement post.

You can watch the activity of the CoinDesk Eth 2.0 validator in real time by following our public validator key, which is:

The hash of the transaction that created an account is stored in the account's account_create_code field.

Visit any Eth 2.0 block explorer site to search for it!